10/08/2013 12:13 EDT | Updated 01/23/2014 06:58 EST

Saputo may be forced to sweeten bid to secure Australian entry, says analyst

MONTREAL - Canadian dairy and cheese giant Saputo won't say if it's willing to sweeten its bid to acquire an Australian dairy processor, a move that would help it springboard to further service Asia's growing market.

"It's a very fair price we have right now and as the circumstances change, we'll see what our strategy is going to be," CEO Lino Saputo Jr. said in an interview Tuesday from Melbourne.

The Montreal-based company has entered into a C$378-million agreement to buy Warrnambool Cheese and Butter Factory Company Holdings Ltd., one of Australia's largest and oldest milk processors.

The bid comes following an unsolicited offer by rival Australian bidder Bega Cheese Ltd. submitted on Sept. 12.

Saputo called analyst suggestions that it may have to increase its bid to compete with a rival local bid "pure speculation."

"At this stage, no one has come forward and we're playing with the cards that are dealt to us right now," he said.

Saputo (TSX:SAP) is offering about AUD$7 (C$6.81) in cash per share for all outstanding shares in Warrnambool, part of which may include a AUD$1.31 dividend. The enterprise value of the offer values the company at C$450 million, including a C$73 million debt as of June 30.

Warrnambool's board has unanimously recommended that shareholders accept the offer, unless it obtains a better one.

Bega offered a cash and share offer at an implied price of AUD$6.30 per Warrnambool share.

Mark Petrie of CIBC World Markets doesn't believe Saputo's price will be enough.

``While the board has recommended shareholders accept this bid, we do not believe it is likely to go through as is, due to Bega's continued interest and 18 per cent equity stake,'' he wrote in a report.

Warrnambool's shares exceeded Saputo's offer in Tuesday trading, closing up 11.15 per cent at AUD$7.18, "implying another bid is expected,'' he added.

Petrie said the price is high compared to Saputo's prior acquisitions, but is "fair'' given the scarcity of opportunities.

But Irene Nattel of RBC Capital Markets suspects the all-cash offer could be successful for Canada's largest dairy processor and one of the 10 biggest in the world.

``We view it as unlikely that a higher bid emerges but we do not profess deep knowledge of the level of motivation of potential buyers,'' she wrote.

She said Saputo's rationale for entering Australia is clear. While it is forced to fight for market share in mature markets in Canada and the United States, Warrnambool provides Saputo with ``opportunities to capitalize on growing global demand for dairy solids.''

Australia exports nearly half of its milk production, accounting for about 10 per cent of the global export market.

Saputo has been eyeing a takeover of the Australian dairy for years as it looks to expand its cheese empire to serve the Asian market, which is currently supplied by Argentina.

Faced with intensified competition and limited growth opportunities in Canada, the company has focused on expansion in the United States, Latin America and Oceania.

Warrnambool chief executive David Lord told a news conference in Australia that the transaction follows more than a decade of strategic and cordial "dialogue'' between the two companies.

"I think it's accurate to say that obviously, that dialogue intensified in recent weeks. We've been talking about the potential for a transaction like this for a long time,'' he said.

Lino Saputo Jr. said he's visited Australia five to six times over the last 12 years and believes Warrnambool is the right fit for the company, with its highly automated manufacturing facilities that can process fluid milk into powder and cheese.

"That's really in our sweet spot. We know there's a great opportunity for us to service the local market and there's also a great opportunity for us to service the emerging international export market," he said.

The chief executive said Asia is only part of the attraction of Warrnambool, which would complement, not replace its Argentine operations.

Saputo also hopes the acquisition will lead to other deals in Australia.

While the potential acquisition would extend Saputo's global footprint, the value of the deal is much smaller than last year's $1.45 billion acquisition of Morningstar Foods.

Keith Howlett of Desjardins Capital Markets said investors have benefited from Saputo's acquisition strategy since it became public in 1997. He expects that Warrnambool would add seven to nine cents per share in earnings for Saputo.

Warrnambool produces milk products, including butter, cheese and cream at two manufacturing sites in Australia where it employs 420 people. Saputo employs 12,000 people at 53 plants in Canada, the United States and Argentina. It earned $482 million on $7.3 billion of revenue last year.

Saputo's investors welcomed the expansion plans, pushing the company's stock to close $2.02 or 4.08 per cent higher at $51.50 on the Toronto Stock Exchange.